Friday, April 26, 2013

Tax Expenditures

In trying to figure out how government finances work, we can’t forget tax expenditures.

That sounds like an oxymoron: a tax can’t be an expenditure … can it?

Welcome to D.C., where it can be. It turns out there is spending and taxes. But a tax expenditure is rebate of one form or another: it’s a tax that should be collected but is somehow exempted. The deductibility of mortgage interest is a good example.

A new or bigger tax break is a "tax cut." (Cheers.) If Congress tells the U.S. Treasury to issue a check for the same sum for the same purpose, it's a spending increase. (Jeers.) So Congress has done a lot of the tax-break approach, which has been dubbed "backdoor spending through the tax code."

This may sound like semantics or, worse, obfuscatory accounting. It's actually a whole lot more than that.

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All these are variants on the same idea. All have similar economic effects. All involve the government using taxpayers' resources to pick up some of the … tab. One type goes through the spending side of the budget, booting the oft-cited statistic measuring government spending as a share of the economy. The other goes through the tax code, reducing government revenue as a share of the economy.

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… Donald Marron of the Urban Institute think tank … and colleague Eric Toder estimate that about two-thirds of the $1.2 trillion a year in tax breaks is "spending in disguise."

Read the whole thing, entitled “Tax Breaks as Spending” in the April 25 issue of The Wall Street Journal.